Hello There, Guest! (LoginRegister)

Post Reply 
Income Inequality
Author Message
dmacfour Offline
All American
*

Posts: 4,822
Joined: Apr 2013
Reputation: 67
I Root For: Idaho Vandals
Location:
Post: #1
Income Inequality
Can someone with more economic knowledge than me explain how differing rates between ordinary income tax and capital gain tax could be contributing to the growing income inequality? I saw someone mention this on a different site and want to know if it actually makes sense or not.
11-13-2014 05:45 PM
Find all posts by this user Quote this message in a reply
Advertisement


Hambone10 Offline
Hooter
*

Posts: 40,279
Joined: Nov 2005
Reputation: 1284
I Root For: My Kids
Location: Right Down th Middle

New Orleans BowlDonatorsThe Parliament Awards
Post: #2
RE: Income Inequality
(11-13-2014 05:45 PM)dmacfour Wrote:  Can someone with more economic knowledge than me explain how differing rates between ordinary income tax and capital gain tax could be contributing to the growing income inequality? I saw someone mention this on a different site and want to know if it actually makes sense or not.

the quick and dirty explanation is that someone making 50k or 100k on their 'income' will be paying a net tax rate which is likely higher than someone who is making $10mm on their 'gains'. While someone might argue in a vacuum that the 'net' rate on someone who earns 50k is less than 15% and the nominal rate on the $10mm is 15%, the reality is that there are deductions and manipulations for stock losses that often make the 'net' rate on the wealthy less than 10%... often zero.

When you get to the point where you're talking about someone making say 300k, they will be paying a blended rate of closer to 25% vs the 15% or lower of the truly wealthy... and THEN you add on top of that things like the ability of someone who makes 10mm/yr in investments to pay the $200,000 1 time fee to set up a foreign shell corporation and completely avoid taxes on that money, while the person earning 300k can't afford the fee so they're paying 25% and the guy at 50k is paying 15%. The person at the top is SAVING a multiple of what the 300k guy earns.

The problem with shelters and gains taxes is that you have to lock your money away for a period... which is obviously a negative... and adds risk and in the example above, costs without adding return (other than the tax break). If you flatten the rates, then there is no need to pay 200,000 for the shelter. The government can actually collect 150k of that (lowering the rate on everyone else) and let the investor keep 50k and he's STILL better off than in the shelter.

there is an argument I support that says that when tax rates are sufficiently different, investors will accept LOWER, tax preferred rates than they would demand of non-preferred rates... and if you take away the preference, they will always take the higher rate of return... thus despite lowering the top rate, you COULD get more revenue... i.e rather than getting 15% tax on a 7% tax preferred investment return, you get 20% on a 9% non-preferred rate. Because at 36% on the 9% return, the investor prefers the 7% return.

I've gone away from the quick and dirty I promised, but I hope that is a starting point.
(This post was last modified: 11-13-2014 06:18 PM by Hambone10.)
11-13-2014 06:13 PM
Find all posts by this user Quote this message in a reply
dmacfour Offline
All American
*

Posts: 4,822
Joined: Apr 2013
Reputation: 67
I Root For: Idaho Vandals
Location:
Post: #3
Income Inequality
Thanks for the thorough response. Would you say this is a major contributor to income inequality?


Sent from my iPhone using Tapatalk
11-13-2014 06:32 PM
Find all posts by this user Quote this message in a reply
Advertisement


Hambone10 Offline
Hooter
*

Posts: 40,279
Joined: Nov 2005
Reputation: 1284
I Root For: My Kids
Location: Right Down th Middle

New Orleans BowlDonatorsThe Parliament Awards
Post: #4
RE: Income Inequality
(11-13-2014 06:32 PM)dmacfour Wrote:  Thanks for the thorough response. Would you say this is a major contributor to income inequality?


Sent from my iPhone using Tapatalk

No. but it's one of the few we can control

The BIGGEST contributor is the rate of return on risk capital versus the rate of return on 'non' risk... like wages.

When you compound that by decades and even generations... you're talking about (using an example) a 10% return on $300mm each year, compounding at that 10% rate versus an average household income of 50,000 rising at the rate of inflation.

The problem is, we control our tax rates, but we don't control where the wealthy can choose to invest... and it is hard to push wages because that just discourages investment 'here'.

The top ideas I have to address these issues are

1) a consumption tax and a prebate which encourages saving, even by the poorest of us and domestic production to absorb those savings
2) micro-capital, encouraging entrepreneurship even among the less wealthy
3) flattening the tax rates and eliminating almost all deductions at perhaps around 12% gains and 20% income max
4) having the government take an equity claw back on its investments/bail-outs on behalf of 'taxpayers'.

if you do this, you CAN push wages some (and they will naturally push themselves some as well) AND you create more opportunities for 'the poor' to become wealthy

The bottom line is that government needs to think like wealthy people and go along for the ride with them... They're obviously pretty good at making money... instead of thinking like poor people THINK wealthy people think and constantly trying to stop them or make them do non-economic things. Most things that worked 20 years ago to keep people from investing in China or even Burundi just don't exist anymore.... but most of our policies act like they do.
(This post was last modified: 11-13-2014 06:50 PM by Hambone10.)
11-13-2014 06:45 PM
Find all posts by this user Quote this message in a reply
I45owl Offline
Hall of Famer
*

Posts: 18,374
Joined: Jun 2005
Reputation: 184
I Root For: Rice Owls
Location: Dallas, TX

New Orleans Bowl
Post: #5
RE: Income Inequality
Here is a timely article on how tax policy can affect income inequality - not because it makes any difference to income inequality, but because it drastically changes how you measure income inequality.

I'm not sure if this would apply to Hambone's explanation (the effect on the end investor seems minimal because the investor makes decisions to minimize that effect, but those decisions themselves may have a big impact on how you measure income inequality). I suspect (without sufficient knowledge of economics, accounting, or tax law to propose a mechanism) that is what the OP is referring to - a change in measured income inequality moreso that an actual change in it.

Phil Gramm and Michael Solon: How to Distort Income Inequality - WSJ - WSJ

http://on.wsj.com/1tEr5UD Wrote:The chosen starting point for the most-quoted part of the Piketty-Saez study is 1979. In that year the inflation rate was 13.3%, interest rates were 15.5% and the poverty rate was rising, but economic misery was distributed more equally than in any year since. That misery led to the election of Ronald Reagan, whose economic policies helped usher in 25 years of lower interest rates, lower inflation and high economic growth. But Messrs. Piketty and Saez tell us it was also a period where the rich got richer, the poor got poorer and only a relatively small number of Americans benefited from the economic booms of the Reagan and Clinton years.

If that dark picture doesn’t sound like the country you lived in, that’s because it isn’t. The Piketty-Saez study looked only at pretax cash market income. It did not take into account taxes. It left out noncash compensation such as employer-provided health insurance and pension contributions. It left out Social Security payments, Medicare and Medicaid benefits, and more than 100 other means-tested government programs. Realized capital gains were included, but not the first $500,000 from the sale of one’s home, which is tax-exempt. IRAs and 401(k)s were counted only when the money is taken out in retirement. Finally, the Piketty-Saez data are based on individual tax returns, which ignore, for any given household, the presence of multiple earners.

And now, thanks to a new study in the Southern Economic Journal, we know what the picture looks like when the missing data are filled in. Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congress’s Joint Committee on Taxation expanded the Piketty-Saez income measure using census data to account for all public and private in-kind benefits, taxes, Social Security payments and household size.

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, America’s middle class, increased by 37%, not 2.2%.

By omitting Social Security, Medicare and Medicaid, the Piketty-Saez study renders most older Americans poor when in reality most have above-average incomes. The exclusion of benefits like employer-provided health insurance, retirement benefits (except when actually paid out in retirement) and capital gains on homes misses much of the income and wealth of middle- and upper-middle income families.

Messrs. Piketty and Saez also did not take into consideration the effect that tax policies have on how people report their incomes. This leads to major distortions. The bipartisan tax reform of 1986 lowered the highest personal tax rate to 28% from 50%, but the top corporate-tax rate was reduced only to 34%. There was, therefore, an incentive to restructure businesses from C-Corps to subchapter S corporations, limited-liability corporations, partnerships and proprietorships, where the same income would now be taxed only once at a lower, personal rate. As businesses restructured, what had been corporate income poured into personal income-tax receipts.

edit: the full article is a good read - it's written by Phil Graham and Michael Solon. The link should get you around the WSJ pay wall, but only for a 1-2 week period. Please let me know by PM if you click and can't pull up the article...
(This post was last modified: 11-14-2014 10:49 AM by I45owl.)
11-14-2014 10:48 AM
Find all posts by this user Quote this message in a reply
Advertisement


Hambone10 Offline
Hooter
*

Posts: 40,279
Joined: Nov 2005
Reputation: 1284
I Root For: My Kids
Location: Right Down th Middle

New Orleans BowlDonatorsThe Parliament Awards
Post: #6
RE: Income Inequality
Good find I45.

It's highly related, but I glossed over it in that when you create advantages for one classification of 'earnings' versus another, you create more of one and less of another.

I can't recall the exact numbers, but when rates were flat at around 28% (the time frame talked about above), the top 400 reported roughly a 65/35 split in w-2 type 'income' and 'earnings'. When you tax 'income' for them at 39.6% and 'earnings' for them at 15% as we do now, the swing is something like 8% income and 92% earnings. The wealthy simply take stock options and hold them for a year rather than a paycheck... and the rest of us generally can't afford to do that.

Another general thought is that workers who almost entirely pay income taxes can't easily move from the US, so the government can pretty well put income taxes at whatever rate they want and most people have to pay them. Wealthy people and corporations can far more easily (especially in the past few decades) move their financial assets, and sometimes even their hard assets to other taxing entities like Ireland, Mexico, China or the Caymans. So our 'gains' rate is essentially set relative to the rest of the world... we aren't really in control of those rates... only how 'different' we are. In general, If we go up, we lose business and investment... if we go down, we gain it.

The reason 'consumption' taxes would work so well is that it doesn't affect the production price.... only the consumption price.... so we can lower the corporate rates to attract more production and thus more jobs and GDP... and because of the higher employment and GDP we can lower individual rates to keep from burdening the workers... and then we simply prefund the 'poor' (however we decide to define that) the amount of the consumption tax putting the actual burden of that tax on those who consume the most... the wealthy. They can't simply consume overseas because they live here... and over there has similar consumption taxes.
(This post was last modified: 11-14-2014 01:30 PM by Hambone10.)
11-14-2014 01:29 PM
Find all posts by this user Quote this message in a reply
Fo Shizzle Offline
Pragmatic Classical Liberal
*

Posts: 42,023
Joined: Dec 2006
Reputation: 1206
I Root For: ECU PIRATES
Location: North Carolina

Balance of Power Contest
Post: #7
RE: Income Inequality
(11-14-2014 01:29 PM)Hambone10 Wrote:  Good find I45.

It's highly related, but I glossed over it in that when you create advantages for one classification of 'earnings' versus another, you create more of one and less of another.

I can't recall the exact numbers, but when rates were flat at around 28% (the time frame talked about above), the top 400 reported roughly a 65/35 split in w-2 type 'income' and 'earnings'. When you tax 'income' for them at 39.6% and 'earnings' for them at 15% as we do now, the swing is something like 8% income and 92% earnings. The wealthy simply take stock options and hold them for a year rather than a paycheck... and the rest of us generally can't afford to do that.

Another general thought is that workers who almost entirely pay income taxes can't easily move from the US, so the government can pretty well put income taxes at whatever rate they want and most people have to pay them. Wealthy people and corporations can far more easily (especially in the past few decades) move their financial assets, and sometimes even their hard assets to other taxing entities like Ireland, Mexico, China or the Caymans. So our 'gains' rate is essentially set relative to the rest of the world... we aren't really in control of those rates... only how 'different' we are. In general, If we go up, we lose business and investment... if we go down, we gain it.

The reason 'consumption' taxes would work so well is that it doesn't affect the production price.... only the consumption price.... so we can lower the corporate rates to attract more production and thus more jobs and GDP... and because of the higher employment and GDP we can lower individual rates to keep from burdening the workers... and then we simply prefund the 'poor' (however we decide to define that) the amount of the consumption tax putting the actual burden of that tax on those who consume the most... the wealthy. They can't simply consume overseas because they live here... and over there has similar consumption taxes.

Tax reform...specifically a consumption tax similar to HR 25 should be in the GOP platform for 2016. It would insure total control of Washington. It is an issue so powerful that independents would vote almost solely for the GOP just too see it happen. It would destroy the Democrat party also. The minute the monthly checks appeared in the mailboxes of those less fortunate to cover their tax burden? The GOP would instantly gain the Blue Dog Dems and probably some traditional Dems also. It would be a serious blow to the Left.
11-16-2014 04:02 PM
Find all posts by this user Quote this message in a reply
Advertisement


Hambone10 Offline
Hooter
*

Posts: 40,279
Joined: Nov 2005
Reputation: 1284
I Root For: My Kids
Location: Right Down th Middle

New Orleans BowlDonatorsThe Parliament Awards
Post: #8
RE: Income Inequality
(11-16-2014 04:02 PM)Fo Shizzle Wrote:  Tax reform...specifically a consumption tax similar to HR 25 should be in the GOP platform for 2016. It would insure total control of Washington. It is an issue so powerful that independents would vote almost solely for the GOP just too see it happen. It would destroy the Democrat party also. The minute the monthly checks appeared in the mailboxes of those less fortunate to cover their tax burden? The GOP would instantly gain the Blue Dog Dems and probably some traditional Dems also. It would be a serious blow to the Left.

IF you can educate enough people enough to get enough votes. The number of gullible/susceptible people in this country never ceases to amaze me.
11-18-2014 02:39 PM
Find all posts by this user Quote this message in a reply
mlb Offline
O' Great One
*

Posts: 20,276
Joined: Mar 2004
Reputation: 540
I Root For: Cincinnati
Location:

Donators
Post: #9
RE: Income Inequality
(11-16-2014 04:02 PM)Fo Shizzle Wrote:  Tax reform...specifically a consumption tax similar to HR 25 should be in the GOP platform for 2016. It would insure total control of Washington. It is an issue so powerful that independents would vote almost solely for the GOP just too see it happen. It would destroy the Democrat party also. The minute the monthly checks appeared in the mailboxes of those less fortunate to cover their tax burden? The GOP would instantly gain the Blue Dog Dems and probably some traditional Dems also. It would be a serious blow to the Left.

It will never happen with either major party because if a consumption tax were to be implemented they'd lose a ton of control over campaign funds from the lobbying interests.
11-18-2014 03:30 PM
Find all posts by this user Quote this message in a reply
Crebman Offline
Heisman
*

Posts: 9,407
Joined: Apr 2007
Reputation: 552
I Root For:
Location:
Post: #10
RE: Income Inequality
(11-18-2014 03:30 PM)mlb Wrote:  
(11-16-2014 04:02 PM)Fo Shizzle Wrote:  Tax reform...specifically a consumption tax similar to HR 25 should be in the GOP platform for 2016. It would insure total control of Washington. It is an issue so powerful that independents would vote almost solely for the GOP just too see it happen. It would destroy the Democrat party also. The minute the monthly checks appeared in the mailboxes of those less fortunate to cover their tax burden? The GOP would instantly gain the Blue Dog Dems and probably some traditional Dems also. It would be a serious blow to the Left.

It will never happen with either major party because if a consumption tax were to be implemented they'd lose a ton of control over campaign funds from the lobbying interests.

Bingo. Those in power don't want to give up the source of their money and power.
11-18-2014 03:33 PM
Find all posts by this user Quote this message in a reply
Post Reply 




User(s) browsing this thread: 1 Guest(s)


Copyright © 2002-2024 Collegiate Sports Nation Bulletin Board System (CSNbbs), All Rights Reserved.
CSNbbs is an independent fan site and is in no way affiliated to the NCAA or any of the schools and conferences it represents.
This site monetizes links. FTC Disclosure.
We allow third-party companies to serve ads and/or collect certain anonymous information when you visit our web site. These companies may use non-personally identifiable information (e.g., click stream information, browser type, time and date, subject of advertisements clicked or scrolled over) during your visits to this and other Web sites in order to provide advertisements about goods and services likely to be of greater interest to you. These companies typically use a cookie or third party web beacon to collect this information. To learn more about this behavioral advertising practice or to opt-out of this type of advertising, you can visit http://www.networkadvertising.org.
Powered By MyBB, © 2002-2024 MyBB Group.